The type of business structure you choose can have enduring tax and legal implications thereby affecting your profitability and survival.
Each type of structure comes with its own set of advantages of disadvantages. Therefore you have to scrutinize each structure to ensure their advantages align with your business type and their disadvantages are what you can live with.
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How to Choose the Right Business Structure
To choose the right business structure, you need to take three vital factors into consideration:
- Tax
- Liability
- Record keeping
The Common Types of Business Entities
Sole proprietorship
In this business structure, you are in complete control of your business and it’s the easiest to create. The major disadvantage of this form of business entity lies in its liability – you’re personally liable for all debts and actions of the business. In the eyes of the law, you and your business are one and the same. You can be sued for the actions of your business.
Another disadvantage is in raising finance. Most banks will reject your application for a loan. If you operate a low-risk business and just starting out and want to test your business idea, a sole proprietorship is appropriate for you. But it’s advisable you get an insurance cover to mitigate the risks you may be exposed to.
Partnership
When two or more people come together and agree to share the profits and losses of their venture, it’s called a partnership. In terms of liability, each partner is liable financially. A major advantage of partnership is that the partnership is not taxed, rather each individual is to file their tax report personally.
Corporation
Any entity that has been legally incorporated to carry out business is known as a corporation. A corporation is different from sole proprietorship and partnership in the sense that the business is completely different and separated from its principals.
The business bears the tax burden and is held liable for its losses, finance, and actions. Founders who choose this form of business structure do so because of the liability the business bears on their behalf. The founders are shielded from tax and legal actions.
The downsides to this structure are the comprehensive record you must keep as required by law and the exorbitant cost of incorporation.
Limited liability company (LLC)
If you are looking for the advantages available in both a partnership and a corporation, then go for LLC. In the UK, a Limited liability Company is liable but only limited the total value of unpaid shares.
Like a corporation, LLC is seen as a ‘person’ in the eyes of the law and has the freedom to own bank accounts, carry out business, buy assets, and get taxed.
If you go for this business structure, you are shielded from personal liability. If the business goes bankrupt, for instance, you won’t be held liable; all your personal assets will be protected.
Technically speaking, as a founder of an LLC company, you are seen as self-employed and are required to make your own personal tax filing based on your income.
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